PNB fraud case: How jewellers in country will be affected

As the PNB fraud was technical in nature and was due to uncontrolled internal security measures, there are chances that banks may take a hard stance on internal security, making issuance of credit notes such as Letter of Undertaking (LoUs) difficult.

PNB fraud may have a negative effect on other jewellers in the sector&nbsp | &nbspPhoto Credit:&nbspBCCL

New Delhi: The massive fraud discovered recently at a Mumbai branch of Punjab National Bank (PNB) has not only stoked a major political battle but has also alerted Indian banks about such scams. There are chances that banks in the country would opt for restricting lending to jewellery and bullion sector due to a series of default cases. Historically, it has been observed that banks put restrictions on lending after the Winsome Group defaulted on paying almost Rs 7,000 crore in 2015.

Reports in the media suggest that the lenders in the bullion sector may now face even tighter norms in terms of borrowing money or credit. As the PNB fraud was technical in nature and was due to uncontrolled internal security measures, there are chances that banks may take a hard stance on internal security, making issuance of credit notes such as Letter of Undertaking (LoUs) difficult.

While experts of the view that the all jewellers should not be scrutinised due to one incident, the banks have no choice at present due to the rising burden of non-performing assets (NPAs), and the pressure of recapitalisation. Experts predict that stricter norms will mostly hurt the small and medium players in the sector. Constraint on loans, credit notes will be a huge blow to smaller players, especially those trying to make a mark in the sector.

It may be noted that the sector employees a total of 10 million people and generates an annual turnover of approximately Rs 4.5 lakh crore. It may be noted that the jewellery and gems sector is vast, taking into account the many other smaller units in the unrecognised sector - all of these workers in the unorganised sector will bear the brunt of tighter lending norms due to a trickle-down effect.

With the discovery the recent Rs 11,400 crore fraud, banks are also wary of the gems and jewellery sector. Some bankers have even said that more security measures will be put in place for any loans granted to companies from the gems and jewellery sector. It may be noted that the Nirav Modi banking fraud is the biggest witnessed in India.

One case that strikes a similar chord with the Nirav Modi fraud is the one involving Jatin Mehta's Winsome Diamonds Group. The CBI last year had booked several cases of fraud against the company for allegedly defrauding three public sector banks to the tune of Rs 1,530 crore. As time went by, the amount of the fraud had increased to almost Rs 7,000 crore. This is the second-biggest banking fraud involving a company in the gems and jewellery business. There are several other cases where jewellery companies have defrauded banks, contributing to the steady rise of NPAs.

The Nirav Modi case has cast a major shadow on one of the country's biggest sectors, raising concerns about growth. It comes at a time when the government was aiming to recapitalise banks, owing to legacy debts and rise in willful defaulters over the years.

PNB fraud case: How jewellers in country will be affected Description:As the PNB fraud was technical in nature and was due to uncontrolled internal security measures, there are chances that banks may take a hard stance on internal security, making issuance of credit notes such as Letter of Undertaking (LoUs) difficult.
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